Corporate Finance
When factoring, the company sells its debts for a lesser sum than the value.
Share capital is the money that the company owns, shares are what the shareholders own. They can use the share capital for whatever they want; there are few restrictions on what the company can do with it.
Shareholders get certain rights in the company that creditors do not get. Shareholders have the right to vote, creditors do not.
From the company's point of view, loan capital can be a problem. If you take a loan out, you'd expect to pay interest. The company must pay this to the creditors on time. It does not have to pay its shareholders. Creditors, unlike shareholders, have no automatic say in the company - they must negotiate and contract for it.
Shares are classified by the rights that are attached to them: the right to earn a dividend; the right to vote; the right, where the company is solvent, to get your money back for the shares. A company may issue shares with more than one type of right; they don't all have to be the same. Where a company has more than one type of share, you talk about different classes of share. The types of rights attached to shares are a matter of the constitution. Where the constitution says nothing about different types of shares, the basic presumption is that all shares enjoy the same rights and they are all worth an equal part of the capital of the company. The Articles of Association may provide for advantages for some shares.
The most common type of shares are ordinary shares: if the constitution or articles do not provide for anything different, ordinary shares are assumed. If articles are silent, there is one vote per share. The amount of dividend will fluctuate depending on how the company is doing and on how much directors decide to pay out. If the company is doing well, they may get higher dividends. Companies try to ensure that their dividends do not fluctuate too steeply. Most listed companies on the London stock market only have ordinary shares and equal rights. If the company is doing badly, the dividend will go down.
The other type of share is preference shares. There is something about preference shares that means that the shareholder is preferred over normal shareholders. Preference shareholders are entitled to a fixed dividend: stays the same regardless of how good or bad the company is doing. Shareholders' right to a dividend is not automatic. Preference shareholders get paid before ordinary shareholders do. If the company is doing really well, preference shareholders get no increase. Creditors have to be paid even when the company is doing badly, but preference shareholders don't. If preference shareholders are not paid, there is an assumption that it is cumulative; they must be paid all accumulated amounts before ordinary shareholders get paid. It is assumed, unless the constitution says otherwise, that it is cumulative.
John Lewis Partnership PLC: all ordinary shares are held privately, by the employees, so are not listed. The public, instead, can buy listed preference shares. John Lewis has done this because it doesn't want control of the company to be moved beyond the employees. Preference shares, unless specified, do not carry voting rights - only ordinary shareholders do. Preference shares are more like investments in the company.
Definitions:
Nominal/par value of shares: Fixed value of the first issue of shares by the company.
Premium: The difference between the market value and the nominal value of the shares.
Shares' market values will depend on things like...
- The area of commerce in which the company is operating;
- The company's place in the area;
- The company's performance relative to competitors;
- General prospects;
- The company's record of earnings;
- Management's dividend policy
Public companies must have £50,000 minimum share capital, and have issued 50,000 shares of £1 each. Paid up share capital is the money that has been paid: £25,000 if only 50p per share is paid. All nominal value must be paid up.
Directors decide whether to issue new shares in the company. In private companies, there is only one class of share. The articles may restrict the power to issue new shares. In public companies, directors can't issue new shares unless the articles allow it, or the shareholders permit it. The permission only lasts for 5 years maximum, and there must be a specified maximum number of shares.
Companies are required to offer new shares to existing shareholders but the articles of a company may exclude this requirement. All companies can disapply by special resolution. It doesn't apply to issues of shares for non-cash consideration. Members are vulnerable because their proportionate holdings may be altered if new shares are not offered pro rata to existing shareholdings and because the value of their shares may be reduced by a new allotment.
Companies can't issue shares at a discount less than nominal value (s 580). This is to ensure that they have received that certain amount of money for that specific number of shares. Private companies can accept other assets for shares - cars etc. Public companies can't issue shares for a non-cash consideration unless the consideration has been independently valued (s 593). If not, the person who gets the shares has to pay the full price of the shares (nominal and premium), and a fine may be imposed on the company officials as it is a criminal offence. Companies also cannot accept work or services to pay for shares (s 585). If shares are issued at a discount, the person who received the shares must pay the discount back.
Share capital is the money that the company owns, shares are what the shareholders own. They can use the share capital for whatever they want; there are few restrictions on what the company can do with it.
Shareholders get certain rights in the company that creditors do not get. Shareholders have the right to vote, creditors do not.
From the company's point of view, loan capital can be a problem. If you take a loan out, you'd expect to pay interest. The company must pay this to the creditors on time. It does not have to pay its shareholders. Creditors, unlike shareholders, have no automatic say in the company - they must negotiate and contract for it.
Shares are classified by the rights that are attached to them: the right to earn a dividend; the right to vote; the right, where the company is solvent, to get your money back for the shares. A company may issue shares with more than one type of right; they don't all have to be the same. Where a company has more than one type of share, you talk about different classes of share. The types of rights attached to shares are a matter of the constitution. Where the constitution says nothing about different types of shares, the basic presumption is that all shares enjoy the same rights and they are all worth an equal part of the capital of the company. The Articles of Association may provide for advantages for some shares.
The most common type of shares are ordinary shares: if the constitution or articles do not provide for anything different, ordinary shares are assumed. If articles are silent, there is one vote per share. The amount of dividend will fluctuate depending on how the company is doing and on how much directors decide to pay out. If the company is doing well, they may get higher dividends. Companies try to ensure that their dividends do not fluctuate too steeply. Most listed companies on the London stock market only have ordinary shares and equal rights. If the company is doing badly, the dividend will go down.
The other type of share is preference shares. There is something about preference shares that means that the shareholder is preferred over normal shareholders. Preference shareholders are entitled to a fixed dividend: stays the same regardless of how good or bad the company is doing. Shareholders' right to a dividend is not automatic. Preference shareholders get paid before ordinary shareholders do. If the company is doing really well, preference shareholders get no increase. Creditors have to be paid even when the company is doing badly, but preference shareholders don't. If preference shareholders are not paid, there is an assumption that it is cumulative; they must be paid all accumulated amounts before ordinary shareholders get paid. It is assumed, unless the constitution says otherwise, that it is cumulative.
John Lewis Partnership PLC: all ordinary shares are held privately, by the employees, so are not listed. The public, instead, can buy listed preference shares. John Lewis has done this because it doesn't want control of the company to be moved beyond the employees. Preference shares, unless specified, do not carry voting rights - only ordinary shareholders do. Preference shares are more like investments in the company.
Definitions:
Nominal/par value of shares: Fixed value of the first issue of shares by the company.
Premium: The difference between the market value and the nominal value of the shares.
Shares' market values will depend on things like...
- The area of commerce in which the company is operating;
- The company's place in the area;
- The company's performance relative to competitors;
- General prospects;
- The company's record of earnings;
- Management's dividend policy
Public companies must have £50,000 minimum share capital, and have issued 50,000 shares of £1 each. Paid up share capital is the money that has been paid: £25,000 if only 50p per share is paid. All nominal value must be paid up.
Directors decide whether to issue new shares in the company. In private companies, there is only one class of share. The articles may restrict the power to issue new shares. In public companies, directors can't issue new shares unless the articles allow it, or the shareholders permit it. The permission only lasts for 5 years maximum, and there must be a specified maximum number of shares.
Companies are required to offer new shares to existing shareholders but the articles of a company may exclude this requirement. All companies can disapply by special resolution. It doesn't apply to issues of shares for non-cash consideration. Members are vulnerable because their proportionate holdings may be altered if new shares are not offered pro rata to existing shareholdings and because the value of their shares may be reduced by a new allotment.
Companies can't issue shares at a discount less than nominal value (s 580). This is to ensure that they have received that certain amount of money for that specific number of shares. Private companies can accept other assets for shares - cars etc. Public companies can't issue shares for a non-cash consideration unless the consideration has been independently valued (s 593). If not, the person who gets the shares has to pay the full price of the shares (nominal and premium), and a fine may be imposed on the company officials as it is a criminal offence. Companies also cannot accept work or services to pay for shares (s 585). If shares are issued at a discount, the person who received the shares must pay the discount back.
Capital Maintenance
When a company has collected in the money for the payment of the shares, there are rules regarding the maintenance of said capital. These rules aren't about keeping the money in a bank account and not touching it; the company can use the capital in the course of running the business.
Section 678 regards public companies only. This section states that a company cannot financially assist a third party in the course of them buying shares. There are rules governing when a company can buy its shares back. It cannot buy shares back unless out of profits.
The rules on the payment of dividends
Shareholders get higher dividends the more shares they hold. A distribution is a return of the company's assets to shareholders. Because there is a risk of shareholders taking all of the assets out of the company, it must be governed by very strict rules to protect creditors. Dividends are only payable out of distributable profits, not out of share capital. The company draws up a set of accounts, and a dividend can only be paid if the company is making a profit and those profits will cover the payment of the dividend.
Even when there are distributable profits, shareholders still have no automatic right to dividends. The articles must provide for the payment of the dividends (which normally they do). Articles also provide that the payment of dividends is entirely at the discretion of the directors. Often it is better to keep the profit and invest it back into the company to help it in the long-term. Directors recommend and shareholders pass an ordinary resolution, which is 'declaring the dividend'. Once a dividend has been declared by a company meeting, the shareholder is legally entitled to it.
A company can declare an interim dividend if the previous year's accounts say there are enough profits. Unless the articles provide to the contrary, dividends are paid on the nominal value of the share and not on what is paid up (Oakbank Oil Co Ltd v Crum 1882).
The shareholders can be liable to repay their dividends if they knew or had reasonable grounds for believing that payment was in contravention of the Act (s. 847). This isn't relevant in big companies, but is in companies where, for example, the directors are also shareholders. Wrap v Gula 2006: the directors were also shareholders and paid themselves through shares even though there was no distributable profit. If they were paid via reasonable salary they would be fine.
Directors' liability is governed by common law (Bairstow v Queens Moat Houses PLC 2000). Directors are personally liable to repay the full amount of the dividend if they were in contravention of the Act and knew or were negligent.
Section 678 regards public companies only. This section states that a company cannot financially assist a third party in the course of them buying shares. There are rules governing when a company can buy its shares back. It cannot buy shares back unless out of profits.
The rules on the payment of dividends
Shareholders get higher dividends the more shares they hold. A distribution is a return of the company's assets to shareholders. Because there is a risk of shareholders taking all of the assets out of the company, it must be governed by very strict rules to protect creditors. Dividends are only payable out of distributable profits, not out of share capital. The company draws up a set of accounts, and a dividend can only be paid if the company is making a profit and those profits will cover the payment of the dividend.
Even when there are distributable profits, shareholders still have no automatic right to dividends. The articles must provide for the payment of the dividends (which normally they do). Articles also provide that the payment of dividends is entirely at the discretion of the directors. Often it is better to keep the profit and invest it back into the company to help it in the long-term. Directors recommend and shareholders pass an ordinary resolution, which is 'declaring the dividend'. Once a dividend has been declared by a company meeting, the shareholder is legally entitled to it.
A company can declare an interim dividend if the previous year's accounts say there are enough profits. Unless the articles provide to the contrary, dividends are paid on the nominal value of the share and not on what is paid up (Oakbank Oil Co Ltd v Crum 1882).
The shareholders can be liable to repay their dividends if they knew or had reasonable grounds for believing that payment was in contravention of the Act (s. 847). This isn't relevant in big companies, but is in companies where, for example, the directors are also shareholders. Wrap v Gula 2006: the directors were also shareholders and paid themselves through shares even though there was no distributable profit. If they were paid via reasonable salary they would be fine.
Directors' liability is governed by common law (Bairstow v Queens Moat Houses PLC 2000). Directors are personally liable to repay the full amount of the dividend if they were in contravention of the Act and knew or were negligent.
Loan Capital
The ratio of loan capital:share capital and other reserves in a company is known as its hearing ration. There is a tax advantage to loan capital. The more borrowing the company does, the higher the risk that they become insolvent. The more loans, the more interest payments. If the company is doing badly, they can't pay the interest and will then become insolvent. Unlike share capital, where shareholders have certain rights e.g. to vote, loan capital creates normal contracts between creditors and companies.
The bargaining strength of the parties determines the rights of the creditors. Creditors can have extensive rights but they must negotiate for them and they must be in the contract. The creditors can wind up the company if they fail to pay interest.
Those who lend money to companies do so by way of debenture (bonds). This is a document containing an acknowledgement of debt by a company. This usually refers to long-term loans. Debentures often contain terms regarding security over the assets of the company. A secured creditor has a right to force the sale of the asset and pay back debt from the proceeds. An unsecured creditor will not get back all of, or any of, their money. In practice the only people who get paid are secured creditors (banks).
The bargaining strength of the parties determines the rights of the creditors. Creditors can have extensive rights but they must negotiate for them and they must be in the contract. The creditors can wind up the company if they fail to pay interest.
Those who lend money to companies do so by way of debenture (bonds). This is a document containing an acknowledgement of debt by a company. This usually refers to long-term loans. Debentures often contain terms regarding security over the assets of the company. A secured creditor has a right to force the sale of the asset and pay back debt from the proceeds. An unsecured creditor will not get back all of, or any of, their money. In practice the only people who get paid are secured creditors (banks).